It was an artful if devastating performance. In just seven minutes, Senator Elizabeth Warren from Massachusetts signaled the arrival of what appears destined to be a powerful force on Capitol Hill. At the influential Banking Committee, Senator Warren exposed profound weaknesses with current market conduct and prudential regulation paradigms. She did so by focusing on two apparently simple but interlinked (and exceptionally complex) questions associated with the governance of major financial firms: can or should too complex institutions be broken up?
First, she asked, when was the last time a major Wall Street bank was successfully litigated against to a conclusion? Faced with silence, Senator Warren offered but received no immediate acceptance to her invitation to the open microphone. “Anyone?” she asked, somewhat incredulously at the reticence an eminent panel of regulators, which included the chair of the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC).
Thomas Curry of the OCC gamely noted that trial litigation was not necessary to achieve regulatory objectives. Luckily for the OCC, he was not asked to comment on the agency’s comprehensive failure of oversight at HSBC, which was subject to a damning report by the Permanent Sub-Committee on Investigations early this year and an eventual $1.92 billion fine in a Department of Justice engineered settlement.
The pressure of five-minute allocation of time meant Senator Warren needed to press on. She had an agenda to scope out. The neophyte politician helpfully explained her question was primarily directed to the SEC. Given its preference for negotiated settlements that have prompted judicial and political concern, the inevitable targeting revealed an alarming lack of preparation on the part of the interim custodian of the SEC.
Elisse Walter, a career administrator, could not provide off-hand a single example of a judicial determination of guilt. She committed to provide the information in due course. The phrasing of both the question and the answer was as acutely embarrassing as revealing of both SEC enforcement priorities and their implications. This, of course, was precisely why Senator Warren posed it in the way she did. Her intervention comes as the Second Circuit in New York is in the process of determining an appeal by the SEC against a Federal Court’s decision not to sign off a multi-million dollar settlement between Citigroup and the agency. The judicial reticence derives from concern that the agreement lacked specificity on what constituted the alleged offence.
Absent the information, Judge Jed Rakoff maintained that it was inappropriate and contrary to the public interest to privilege agency discretion. The SEC countered it was an unacceptable judicial restraint, a view publicly scorned by the court-appointed lawyer hired to defend Rakoff’s initial decision to the Second Circuit because of a commonality between the SEC and Citigroup in seeking the initial agreement upheld without provision of additional information. Second, Senator Warren wondered, why was it that these same banks were trading below asset value? Notwithstanding government bailouts, what she inferred were sweetheart deals to end litigation and a nascent, if uncertain, stockmarket rally.
Was this, she surmised, because investors did not trust the financial accounts? Or, more likely, that these same investors had come to the conclusion that the financial institutions were ungovernable? The market itself, she implied, had come to the conclusion that both deficiencies in the business model and government strategy had led to unsustainable outcomes. The imposition of a corporate death sentence (i.e. break up) was the only sensible remedy to the charge of too big too fail, too big to litigate against, and too big to prudentially govern. The power of the critique was magnified by the tenor of its delivery. Senator Warren opted for empathy over the bombastic hectoring that has propelled an exceptionally divisive campaign to influence the trajectory of financial regulatory reform in the United States. Her stewardship of the Congressional Troubled Asset Recovery Program (TARP) in 2010 signaled the arrival of a powerful voice. Her stridency, however, alienated industry, the Republicans and conservative Democrats alike. It ensured that she was passed over for leadership of the Consumer Financial Protection Bureau, which she had both designed and established. Warren, however, refused to bow out, making her bid for senatorial election as much a plebiscite on how to hold Wall Street to account as a mandate to advance state interests.
Now ensconced on the influential Senate Banking Committee, Senator Warren has learnt some valuable lessons in political theatre. Gracious, tactful and mindful that the independent regulatory agencies fulfilled a critical governance function, Warren nonetheless eviscerated the regulators who she accepted were doing a difficult job. In a manner akin to a supervisor gently nudging a graduate student committed to an erroneous path, Warren signaled that continuance of such a strategy is destined to fail. As a politician, she warned that public continuance would be ruthlessly exposed. Regulators as well as the regulated are put on formal notice. Capitol Hill promises, as a consequence, to be much more interesting beat than the Harvard classroom, as much for Senator Warren as students of regulatory design.
Justin O'Brien writes a column for The Conversation, The ethical deal, and is director of the UNSW Centre for Law, Markets and Regulation portal, where this story also appears.